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Heard on the Floor

The issue of privatization — both for retailers and real estate companies — was a dominant theme at the New York National Conference and Dealmaking, which was held in early December.

The topic came up at the opening panel — a discussion of major trends impacting retail real estate — and reemerged at other sessions and in conversations on the show floor.

At the opening panel two owners who have participated in retail takeouts — Acadia Realty Trust and National Realty Development Corp. — explained their approach to the deals. In other sessions, speculation was rampant about the possibility of retail REITs going private as well as discussion of what retailers might be buyout targets of private equity buyers, who are sitting on a war chest of cash.

Executives from National Realty Development Corp., which participated in the buyouts of Lord & Taylor and Linens N' Things, and Acadia Realty Corp., which was involved in the takeover of Mervyn's, said those deals were both about cashing in on underlying real estate value and turning around retail operations.

“Our intentions have been misunderstood,” said Richard Baker, vice chairman for National Realty and now chairman of Lord & Taylor, which National Realty acquired earlier this year. He said that most observers had assumed that the ailing chain's allure was real estate, in particular its flagship on New York's Fifth Avenue. But Baker says the company is not just in it for the sites and is intent on operating Lord & Taylor locations.

Kenneth Bernstein, president and CEO of Acadia Realty, which participated in buying Mervyn's from Target Inc. in late 2005, said his company is approaching takeouts in a similar way. “This is not an either/or business,” he said. “First you have to look at what a retailer owns or what they have full control over versus what they lease. You evaluate that. But you also have to have a strong operator. If you just try to liquidate the real estate, it's very difficult.”

Clearly, real estate is a top priority — both companies are looking at weaker stores and deciding whether to redevelop the sites or to add in-line space or non-retail uses to try and boost sagging sales. Baker hinted that National Realty would likely shrink the amount of retail floor space at Lord & Taylor's flagship and convert some of the upper floors to office space.

In another session, Christine Augustine, a retail analyst with Bear Stearns, predicted that private equity buyers would continue to pursue retailers. “The private equity investors are willing to accept a lower rate of return than they have historically,” she said. “But some of these deals might actually be good for the retailer — the company may be a little more disciplined as to where to go.”

In the wake of the $36 billion deal by Blackstone Group for Equity Office Properties, attendees at the New York show were buzzing about the possible privatization of major retail REITs. Observers noted that Blackstone is funding the acquisition largely through conventional real estate debt ($29 billion in mortgages and mezzanine financing) rather than using more expensive junk bonds. That, they say, could be a model for a takeout of a retail REIT.